CGCL — earnings call

The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.

Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to Capri Global Capital Limited

Questions and answers

Moderator · Conference Operator

Thank you very much.

We will now begin the question and answer session.

Ladies and gentlemen, we will wait for a moment while the question queue assembles.

Our first question is from the line of Ashwin Agrawal from Akash Ganga Investments Private Limited.

Please go ahead.

Ashwin Agrawal

Sir first of all, congratulations for a good set of results.

So, my question was that due to rising interest rates how do you see the borrowing cost moving forward as the interest rates are going to rise further and how should the same be passed on to the borrowers?

Rajesh Sharma

So a majority of the portfolio under MSME and Affordable Housing is semi-fixed level and there, it is possible to pass on the hike to the customers.

Our customers are from low-income proof category - the smaller customers - they care more for the availability of funds than the cost of funds.

So passing on 30 to 40 basis points to the customer will not be difficult.

So, I think that cost of fund - whatever the increases - we are going to have our ALCO meeting during the month end.

By this time we will be able to consider the effect of all the banks and determine our hike* and on the basis of formula which has been given by the RBI, will pass on the entire cost to the customers.

(*increase in CGCL’s Cost of Funds)

Ashwin Agrawal

So the spreads would be largely be maintained in 6.3% to 6.5% kind of range only?

Rajesh Sharma

Yes.

Ashwin Agrawal

Okay so that range?

Rajesh Sharma

We will be able to maintain the spreads.

Ashwin Agrawal

And my next question was that when we see our growth targets, our major contributors are going to come from the gold and MSMEs.

How do you see the MSME sector like shaping up in terms of growth?

Rajesh Sharma

So MSME segment is going to be a key contributor for us.

I think going forward on a consolidated basis, MSME segment will continue to remain the biggest contributor.

Currently the AUM is about 50% and with the gold loan inclusive it may come down to about 35%, but still, it is going to be the majority of it.

Ashwin Agrawal

Thank you Sir.

Capri Global Capital Limited May 23, 2022

Moderator · Conference Operator

Thank you.

Our next question is from the line of Naman Bhansali from Perpetuity Ventures LLP.

Please go ahead.

Naman Bhansali

Thank you for the opportunity.

My first question is on the cost-to-income ratio which has been slightly inching upwards.

Is it attributed majorly to branch expansion and what sort of guidance do we have here for FY23 given that we will continue to add new branches?

Rajesh Sharma

So, I would like to say that our cost-to-income ratio also comprises the cost of car loans segment where we have almost 400 employees.

In the current context, Cost/Average AUM would be a more robust way of tracking our cost efficiency.

Please note our employee and non-employee operating expenses now include the opex incurred on our Car Loan Distribution team, which is almost 1/6th of our headcount and on our payrolls.

The AUM this team creates is a one-time fee generating AUM and not a spread generating AUM that sits on our balance sheet.

While looking at the quarterly Cost / Average AUM ratio, one should include the car loan AUM in denominator.

This would deflate the Cost / Average AUM ratio by 50 to 60 basis points.

So, if you look at our Opex / Average AUM ratio, it will decline by 50 to 60 basis points that way.

I think while we have given a 40% cost to income ratio guidance in FY22, I think we should be able to keep our cost to income ratio in the range of about 40%.

Naman Bhansali

Okay and my second question is that could you please talk a bit on the housing finance business like have the things improved and how have they increased and anything on how we see that on the business environment front?

Rajesh Sharma

If you look at our housing business AUM, it has grown almost 51% during this year.

We have already increased about 32 branches during the year.

Our expansion is continuing and funds in the housing finance company are available from NHB.

It is about 4%.

So, there is a big cushion available in the margins because of the low cost fund availability from the NHB.

And demand is there.

We see on the ground the business is growing well.

Next year also we will continue with the case of 30% plus onwards in this segment.

So, because of low cost funds, because of the demand, and because of increase in the branch, I think growth will be there and margins will be better.

Naman Bhansali

That helps.

Thank you.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Amrish Kumar from Geosphere Capital.

Please go ahead.

Capri Global Capital Limited May 23, 2022

Amrish Kumar

Sir thank you for the opportunity.

I wanted to ask you something on your gold loan business.

In the past you have explained that this is a very good opportunity and this is a very good business.

You get high single digits to double digits margins, then there is hardly any cost of delinquency.

So, this is indeed a good business.

But in the past, can you can explain why there have been such only few players in this business?

I will give you another observation of mine.

The State Bank of India which increased its gold loan business by about 5x in the last two to three years has also gone slow.

The last two to three quarters, I am not seeing its AUM growing that fast.

So can you explain what is stopping everyone else to come into this?

Just your observation?

Rajesh Sharma

So gold loan business requires a deep penetration and large number of branches.

It is a very high operating cost business in the segment where NBFCs operate.

The customers of the banks are different and NBFC customers are entirely different.

Banks would lend at about 9% rate of interest whereas the NBFCs do lend in the range of about 15% to 20%.

So, there is a distinctly different customer segment.

To operate in the gold loan segment is a high opex business as I said, and it requires a large branch network.

If you see our plan, we are also planning to open 1,500 branches.

You have to deeply penetrate, your branches have to be at the ground floor level where the rentals are high, you have to put up the strong room, take the insurance, keep a well-trained gold valuer, and then do the business.

So, it is a business which requires a particular size.

Without that this business will not be able to be profitable.

Hence any NBFC will either plan for a deep branch network – 1,000 plus or it will not turn out to be profitable and this could be one deterrent.

Barring that, I think there is a good appetite more in the North and West.

South is already well covered by Muthoot, Manappuram and other players but North and West still has a lot of scope.

If you see other competition in the gold loan, 80% of their newer expansion is happening in the North and West.

We had engaged the Boston Consulting Group and a couple of credit bureaus to get the data and I think this business still has a lot of scope.

And what we are talking is only creating a book in the next five years of Rs8,000 Crores which in the Indian context and looking at the overall size of Rs3 Lakh Crores, is still very small.

So, while in the overall context it is doable, it is going to be profitable for us and it will give us a cross sell opportunity.

Now our customer segment is the same.

The kind of customer we deal in MSME are same, housing finance is the same and the same customer will be in the gold loan.

So, this is also going to help in the cross-sell as well.

Amrish Kumar

So, my question on this will be if banks are giving gold loan at 9% to 10% and NBFC like you giving gold loan at 15% to 16% and I understand that banks have Capri Global Capital Limited May 23, 2022 higher cost of operations and all.

So, do you think that 10% them giving their ROA in this business or ROE in this business would be similar to us?

Rajesh Sharma

I have not tracked what the bank ROAs are in this business.

But I would say the banks deal with customers who are their existing customers, whose data is available with them whereas we have to just see the value of their gold, take their KYC, and give the money.

The same is finished in 10 minutes whereas the banks take much longer time.

So, the customer segment is different.

Now what will be the banks’ ROAs on this, I have not really tracked.

Amrish Kumar

Sir the second question is on your asset quality.

In the last quarter did it vary from what you had expected at the beginning of the quarter or was it in-line with your expectations and what do you expect now for the next quarter or two where your asset quality would be in terms of new stress formation?

Rajesh Sharma

So, in the last quarter we have seen the collection trend of one particular segment of the customer and based on the feedback by our collection team and their track record, we have chosen to write-off those accounts where we estimated that money is not going to come and it is better to clean up rather than continuing with those accounts.

While technically the collection is for reporting to CIBIL and recovery efforts by Section 113, other measures will continue.

But as a prudent measure to clean up the balance sheet of such accounts, we have decided to write-off those accounts.

And if you see our write-off, which on a consolidated level is about Rs22 Crores* that we have done.

Similarly, we have also taken additional provisions that has resulted in a higher PCR and strengthened the balance sheet.

Going forward, this is a one-off.

This is not going to be repeated and we feel in the coming year, our delinquencies will be lower, our GNPA level will be lower.

If you see the delinquencies trend, it is healthy.

Our GNPA has come down, Net NPA has come down.

GNPA has come down when compared to 2.99% in Q2, it has come down to 2.40% at a consolidated level.

If you talk about housing finance company, it has come down to 1.5% and if you talk about CGCL** where the GNPA has come from 3.5% to 2.7%.

So there, drastically GNPA has come down.

Our collection efficiency as I said is nearly at pre-COVID level and in housing finance segment, it has almost crossed about 99%.

So, collection efficiency is good and major write-off has taken place.

In the future, we do not see any trend coming up which will give us surprises.

(* for Q4FY22, **CGCL Standalone)

Amrish Kumar

Got it.

So I assume that this was your clean up quarter…the last quarter?

Capri Global Capital Limited May 23, 2022

Rajesh Sharma

Yes.

Amrish Kumar

My last question would be Sir on the progress of your co-lending business with SBI.

I assume this is a very exciting and a very big opportunity for you.

So can you just expand a little bit more on this?

Where have we reached in the last one quarter and where we are right now and where are you seeing this going forward in the next few quarters?

Any guidance or any kind of color would be very good for us.

Rajesh Sharma

Currently co-lending is still happening manually because all PSU banks follow a very strong system of technology and firewall.

They have given to some vendor where technology module will be developed where we will put up the file in our system and that through some intervening system will go and sit in their system.

They will then approve or decline based on their underwriting parameters and that will happen online.

Currently all is happening manually.

With that also we were able to achieve in the last quarter Rs1.15 billion in co-lending.

And with this pace, we are hopeful to do about Rs6 billion co-lending in the next year minimum.

I think this is a very conservative target.

Hoping that the latest technology platform will be built in the next three to four months then only this will take off.

Here the advantage is 80% money is going to be given by the banks and 20% is by us and that 20% also indirectly we will get funding.

So, our ability to leverage will become almost 25 times and this can be a real game changer.

Another aspect over here is every year we see about 10% to 12% of foreclosures.

And those customers go to lower rate of interest for other NBFCs or preferably with the banks.

Those customers are our best or cream portfolio.

With co- lending, we will be able to hold those customers with us rather than they leaving us and that will bring a big change in our foreclosure trend.

If you look at the last year, almost Rs600 Crores plus amount of customers we lost under foreclosure.

Their income has gone for the subsequent years and if you are able to retain even 60% to 70% of that in the co-lending, this is going to make our profitability better.

So, under the co-lending arrangement, any customer coming for foreclosure, we can reduce the rate and shift to co-lending.

Because in housing finance, our co-lending tie up is at about 6.8% and our MSME co-lending tie up is about 8.5%.

So, customer will not be given a loan at 14% because after 12 months record or some other progress some bank or some NBFC or rather bank is willing to give a low rate at 11% or 10.5% or 10%.

Under the co-lending we will be to retain him by offering the lower rate of interest and by this a major chunk of the customer and best of the customer who leave us we will be able to retain and it is going to significantly change our income.

Those customers we can do cross sell also later.

So I think co-lending is going to be a big game changer for us and Capri Global Capital Limited May 23, 2022 we are hoping that technology will be built very soon.

The banks have already given that mandate through their open tender system and whatever mechanism is and we hope that next three to four months that should be in place.

But without that also we on a conservative basis will be able to achieve about Rs600 Crores under the co-lending.

Amrish Kumar

Got it Sir.

That is very helpful.

Thank you.

I will come back in the queue.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Dr. Ajit Kaushal an investor.

Please go ahead.

Ajit Kaushal

This is Dr. Ajit Kaushal.

I am a Professor of Law.

First of all I would like to congratulate you for a very good result once again and under your leadership the company is doing well.

I would like to ask the question which really concerns me as a shareholder.

You are already a Managing Director and now you are Chief Financial Officer of the company as well.

So, what message would you like to give by making such kind of changes?

Do you foresee to a plan hire another CFO in the near future who could work full time in the company?

Rajesh Sharma

So, CFO is the KMP position which cannot be kept vacant for more than six months and that is the reason to fill that the Board has given the additional charge to me especially as it cannot be kept open for more than six months.

While we were looking out for a CFO, we had finalized somebody but because of some reason he could not join us and that has delayed the process.

So, the search is on.

We hope that in the next two to three months we should be able to onboard the CFO.

We have already given that mandate to a large search firm so it should be filled very soon.

Ajit Kaushal

Sir we have a firm belief in your leadership and I am sure that Capri Global is going to set a very good example as far as the corporate governance is concerned.

My second question is Sir, Deloitte was our auditor and now in place of Deloitte another auditor has come.

Deloitte has very good reputation in the market.

May I know as a shareholder what would be the frame of mind and what would be the circumstances under which the key auditors have changed?

What may be the reason behind it?

Rajesh Sharma

Last year, the Reserve Bank of India had come out with a circular stating that any auditor who is continuing in any NBFC cannot keep more than eight number of audits.

Deloitte was with us in the fourth year and they had to limit that under the circular.

So we had to choose another auditor.

The current auditor MM Nissim & Capri Global Capital Limited May 23, 2022 Co has been selected very carefully after talking to many.

MM Nissim & Co also happened to be the auditor of HDFC Bank, Kotak Prime and many other reputed large corporates.

So based on their strength we selected them.

And I think they are equally good as compared to Deloitte.

It is a very high quality audit firm.

Deloitte had to go because of the limitation RBI put on them, not that we asked them to go.

Ajit Kaushal

Thank you so much for your answer.

It is really helpful.

Thank you so much.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Vineet Agarwal from Edelweiss Broking Limited.

Please go ahead.

Vineet Agarwal

Congratulations on a good set of numbers Just one question - how much of your restructured books are still under moratorium and what is the collection efficiency under the restructured books?

Rajesh Sharma

As far as our NBFC is concerned, we have about 3.3% book still under the restructuring and in NBFC the moratorium period is over.

However, in housing finance, it is still continuing.

So, moratorium on about Rs13.14 Crores portfolio in housing finance is still continuing.

Vineet Agarwal

And how is the collection efficiency in restructured books?

Rajesh Sharma

Restructured book collection efficiency is slightly lower than the normal pool.

It is about 80%.

But collection efforts are all going on and all these are secured.

So, the moment money does not come they fall in the NPA category and there we are able to initiate this SARFAESI action and start the recoveries.

So, anything which goes into SARFAESI, we are able to recover the amount within nine months’ time.

So I do not think there is any major concern on that side.

The amount is also small and the moment it becomes NPA, it entitles us to take over their secured assets under SARFAESI and recover the amount.

Vineet Agarwal

Thank you Sir.

That’s it from my side.

Moderator · Conference Operator

Thank you.

As there are no further questions, I would like to hand the conference over to the management for closing remarks.

Rajesh Sharma

Thank you all for joining the call.

As I said we will continue to grow in the path of the stated strategy of lending in the secured segment where banks are not catering and serving to those customers be it MSME, be it affordable housing and now be it the gold loan.

So same kind of customer in the common Capri Global Capital Limited May 23, 2022 geography we will continue to operate and I think it is a business which requires the ground / local understanding, has entry barriers.

Having been in these businesses for more than about nine years, we are quite confident to grow about 25% for the next four to five years.

As a promoter, we are committed to infuse more money as and when needed by the way of rights issue or any other mode.

We are committed to this business and we see there is a golden opportunity because of co-lending where our ROE will be better because once this co- lending takes off, we won’t not require much of capital and this can be a complete change in the business.

In our new car loan origination business, we do not require any capital but use our banking relationship leverage and our branch network leverage.

Next year, we will continue to do about Rs3,000 Crores of average new car loan origination.

That means almost Rs75 Crores worth of fee income we will be able to generate and it will be a very good profitability contributor.

So collectively, looking at co-lending profit and looking at the profit from the new car loan vertical, it should improve our profitability although on the gold loan branches next year we will be spending money and gold loan branches will take about 15 to 18 months to deliver profit.

They will remain under initially the process of setup and removing some of the losses.

But from 18th month onwards they will become profitable.

But the profit generated from car loan, co-lending, and then the high AUM growth I think should be able to take care of it.

So overall we are quite optimistic for the next year with all these positive developments.

Thank you.

Thank you so much.

Moderator · Conference Operator

Thank you.

On behalf of Go India Advisors that concludes this conference.

Thank you for joining us and you may now disconnect your lines.